Buying a home is one of the biggest purchases you’ll ever make. It’s also an investment that has many potential benefits, but only if done correctly. Here are some steps to help ensure your purchase is successful and rewarding.

The “preparing to buy a house checklist” is an 8-step list that can help you prepare for buying a home. The steps are:

8 steps you need to take before buying a home

Whether you’re a first-time purchaser or have been buying and selling real estate for decades, purchasing a house is a significant and costly investment. Homeownership has financial benefits and hazards, and it’s also an emotional transaction for many individuals.

So, how do you become ready to purchase a home? Long before you start looking at internet listings, attending open houses, or dealing with a real estate agent, you should start getting ready.

Today, I’ll show you how to figure out whether homeownership is appropriate for you, how much you can afford, how to save for a down payment, and how to obtain the best mortgage rate. The more you understand and prepare for the house purchasing process, the less expensive and stressful it will be.

Here’s additional information on each step you may take to prepare your finances for a house purchase.

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1. Compare renting to purchasing.

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Before you begin frantically looking for your ideal house, be sure that buying a home is the correct decision for you. There is no financial need that you purchase a property. In certain instances, it’s preferable to avoid becoming a homeowner.

Several variables influence whether you should buy or rent, including:

  • You may live anywhere you choose. Renting a property in a big city might be significantly less costly than purchasing one.
  • How long do you intend to stay in one place? In general, you should not purchase a property until you are certain you will remain there for at least three years. This allows you to recoup your purchase expenditures and prepare to sell the home.
  • Which lifestyle do you prefer? Being a homeowner enables many individuals to pursue activities they couldn’t pursue as a renter, such as gardening or house renovation. However, people who travel often or do not want to be responsible for the upkeep and continuing maintenance of a property may find renting more tempting.

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2. Run a credit report

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If you decide to pursue homeownership, the next step is to examine your credit reports and scores thoroughly. Maintaining good credit is always essential, but it’s especially crucial when purchasing a house since it’s a major element in how mortgage lenders assess you.

Not only can repairing and improving your credit help you be accepted for a mortgage, but it will also help you qualify for a low-interest loan, which will save you a lot of money in interest.

For example, if you have perfect credit and get a $200,000 fixed-rate mortgage, you will pay about $145,000 in interest over the course of the loan’s 30-year term. If you have mediocre credit, however, the same loan would cost you about $190,000 in interest, or $45,000 more!

Credit scores are generated using information from your credit reports, which changes often as new information is added and old data is removed. Check your credit reports and repair any problems as soon as possible, such as inaccurate account balances, payment dates, or personal information.

The major credit bureaus, Equifax, Experian, and TransUnion, provide direct access to your information. AnnualCreditReport.com, Credit Karma, and Credit Sesame are just a few of the numerous free credit sites available.

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3. Improve your credit score

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If you have credit issues, such as late payments or collections accounts, start working on them at least six months to a year before applying for a mortgage. Even if you pay off an outstanding debt, accurate negative information will remain on your credit reports for seven years. The longer a delinquent account is open, the less it affects your credit score.

Consider paying off any past due accounts or arranging settlements with creditors before applying for a mortgage. Catching up on late payments improves your credit score, making you seem less hazardous to lenders.

Important! One word of caution: if you have previous past-due debts, paying them might reset the statute of limitations, putting you at danger of legal action. So, before you contact your creditors or mail a payment, talk with an attorney if you have a considerable amount of unpaid debt.

For additional information on dealing sensibly with past debts, see The Statute of Limitations and 4 Options for Old Debt.

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4. Calculate your debt-to-income ratio (DTI).

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Calculate your DTI before applying for a mortgage and discover what adjustments you may need to make. To figure out how your spending compare to your income, mortgage lenders look at a few debt-to-income ratios. It’s a decent estimate of how much debt you might easily take on.

The payment on the mortgage you’re seeking for should be less than 30% of your salary, according to most lenders. And a typical acceptable debt-to-income ratio for all of your loans, including the new mortgage, is no more than 40%. You may have to pay down debt levels if you surpass certain loan restrictions. However, each lender’s underwriting requirements vary, and DTI ratios may be adjusted depending on your financial circumstances.

Pay your payments on time, lower your debt as much as possible, and avoid applying for new credit accounts, such as a credit card or an auto loan, while you’re getting ready to purchase a house. These activities will help you improve your credit and decrease your DTI.

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5. Determine how much you can spend.

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The next step is to think about all of the expenses associated with purchasing a property.

How Much House Can I Afford? is a great resource from Bankrate. Calculator that lets you enter your monthly income and projected household costs.

Here are some extra costs to consider in addition to your mortgage payment:

  • Local governments collect property taxes, which vary based on where you reside. The average annual sum might be between $3,000 and $4,000.
  • Mortgage lenders demand homeowners insurance to safeguard their properties from calamities such as fire, windstorms, and vandalism. Many variables influence the price, including the home’s worth, location, and amenities. The typical annual premium might be between $800 and $1,500.
  • When you make a down payment of less than 20%, you must also pay private mortgage insurance (PMI). The premium varies depending on the value of your house, but it might add $50 to $150 to your monthly mortgage payment until you have enough equity to cancel it.
  • In certain areas or communities, homeowner association (HOA) fees may be needed to pay for community facilities such as a pool, boat dock, or landscaping. The monthly fee might be $50 or much more.
  • Home upkeep should be required at all times. A decent rule of thumb is to set aside at least 1% of your home’s worth for maintenance each year. For example, if your property is worth $300,000, set aside $3,000 every year to cover future repairs such as a broken HVAC system or a broken water heater.

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6. Put up a substantial down payment

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You’ve definitely been thinking about how to save money for a down payment if your aim is to purchase a house. You must demonstrate to a prospective lender that you have sufficient resources to cover a down payment in order to qualify for a mortgage.

Because lenders don’t finance the whole cost of a property, the down payment has an impact on the debt owed in addition to the mortgage profits. To a lender, the more you can pay, the less dangerous you are. Your mortgage and monthly payments will be reduced if you make a greater down payment.

While a down payment may vary from 5% to 20% of the home’s purchase price, you may have extra upfront expenditures to pay at the closing table, such as:

  • Checking your credit
  • Underwriting or loan origination fees
  • Appraisal
  • Inspections of homes
  • Discount points on mortgages (which allow you to get a lower interest rate)
  • Property inspection
  • insurance on title
  • Deed documentation

One advice is to propose that the seller cover part of your closing fees when making a buying offer. You may also negotiate with your mortgage lender to avoid paying any upfront costs. Just about everything in real estate is negotiable, so don’t be afraid to ask for concessions.

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Assistance with down payment

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If you’re a first-time homebuyer, a veteran, have a low income, or want to buy property in a rural area, it’s possible to qualify for Assistance with down payment through these programs:

The benefits of Assistance with down payment programs vary depending on their rules and your circumstances, but they offer low or no down payment, making it much easier to become a homeowner.

Money for a down payment might come from your savings or from family members. If you’re currently a homeowner, you may use the proceeds from the sale of your present property to fund your down payment.

 

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Savings options for a down payment

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Here are some simple strategies to save for a down payment:

  • Reduce your housing costs by relocating to a less costly location in order to save money for your down payment.
  • Set up a regular monthly transfer or have a part of your income put into a designated savings account to automate your savings.
  • Bundle your services to save money on utilities like cable, internet, and wireless.
  • If you haven’t shopped around for vehicle or renters insurance in a while, now is the time.
  • Save whatever additional money you get from work, such as increases or bonuses, presents, and tax returns.
  • Start a second business to supplement your income while saving for a new house.

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7. Use caution while accessing retirement funds.

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Another option for a down payment is to use a retirement account, such as an IRA or 401(k) (k). While I do not suggest it, it is possible under certain circumstances.

If you’re a first-time homeowner, you may withdraw up to $10,000 from a conventional IRA for a down payment. You must pay taxes on the withdrawal, but you will not be subject to the 10% early withdrawal penalty if you are under the age of 5912.

You may take your initial contributions from a Roth IRA without paying taxes or incurring a penalty, regardless of your age. However, taking money out of the account before reaching the age of 5912 would result in taxes and an early withdrawal penalty.

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‘Difficulty’ withdrawals

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If you have a 401(k) or 403(b) plan at work, you may usually take “hardship” withdrawals for things like purchasing or fixing a main residence. If you’re younger than 5912, though, taking a payout entails paying income taxes and a withdrawal penalty. You can also be barred from contributing to your retirement account for six months.

Loans are permitted in certain workplace retirement programs. You may be able to borrow up to $50,000, or half of your vested balance. You must reimburse it to your account with interest within five years. A house purchase, on the other hand, may have a longer duration. You won’t have to pay income tax or a penalty on a loan if you pay it back on time.

If you don’t return your 401(k) or 403(b) loan on time, the unpaid sum becomes an early withdrawal. If you’re under the age of 5912, you’ll have to pay income tax plus a ten percent penalty.

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A last word of warning about withdrawals

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If you lose your job or are fired, you will most likely be required to repay the full outstanding loan balance within a short period of time, such as 60 days. Before signing up for a loan, check your retirement plan contract or contact your benefits administrator for all the information.

To summarize, if you need to borrow money from a retirement account to purchase a house, a small withdrawal from your Roth IRA is the best alternative. In general, though, I don’t advise emptying a retirement account for any reason. It has far too many disadvantages, including the inability to make additional contributions for a period of time, the loss of employer matching, the risk of having a depleted retirement account, and the loss of the potential to create wealth.

While taking out a loan or withdrawing funds from a retirement account may make sense for certain house purchasers, the optimal situation is to have enough savings to avoid having to touch your retirement funds in the first place. Always with a financial advisor before tapping into your retirement account for any reason.

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8. Obtain a mortgage preapproval letter

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It’s time to be pre-approved for a mortgage once you’ve checked your credit, determined how much you can afford, and saved up enough money for a down payment. You might apply to a few other lenders and compare quotations.

A lender reviews your credit, confirms your income, and validates numerous documents during a preapproval. They provide a limit loan amount and interest rate for a certain length of time, such as 30 or 60 days, while you search for houses.

MediaFeed.org syndicated this post, which originally appeared on QuickAndDirtyTips.com.

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